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Testimony shows thousands of people are scamming the First-Time Homebuyer Credit, but Congress still wants to extend program.

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Testimony shows thousands of people are scamming the First-Time Homebuyer Credit, but Congress still wants to extend program.

Thousands of people are scamming the First-Time Homebuyer Credit for hundreds of millions of dollars, according to the testimony last week of a Treasury Department Inspector General.  Now Congress apparently wants to extend this program again without fixing it.

The Ways & Means Oversight subcommittee held hearings into to examine widespread fraud in the program.  Treasury Inspector General for Tax Administration J. Russell George testified just one part of the program resulted in $500 million is being scammed from the program due to lack of proper oversight procedures by the IRS.  The IG’s investigation found that at least 74,000 filers had owned a home within the prior three years.  And that barely scratches the surface.

More widespread fraudulent payouts resulted from the IRS Form 5405 that allows taxpayers to calculate and file for the credit.  The IRS did not require any additional documentation that would enable the agency to actually verify the purchase of a home, the date of purchase, the purchase price, and the location of the residence.

According to the IG’s testimony,

“The IRS considers the requirement to supply documentation burdensome because if taxpayers do not provide documentation, the IRS must still process the claim for the Credit. The IRS does not have math error authority to disallow the Credit during processing. The IRS also noted that requiring documentation would preclude many taxpayers from electronically filing their returns. We disagree with the IRS’s assertion that requiring documentation would preclude e-filing. Taxpayers claiming the Credit who wish to e-file their returns would still be able to do so, provided they separately mail a paper copy of the additional documentation. Furthermore, requiring taxpayers to provide documentation would discourage abuse of the Credit before it occurs, much in the same way that requiring documentation to substantiate certain noncash charitable contributions discourages abuse.”

Only three criteria would have disallowed the credit claims: failure to attach Form 5405 to the tax return, claiming an amount in excess of the maximum $8,000 or exceeding the income limit allowed to obtain the credit ($95,000 for individuals/$170,000 for joint filers).  Anyone else filling out Form 5405 claiming the credit got the credit.

The credit was originally created by the Democrat Congress in the Housing and Economic Recovery Act of 2008 (HERA). The credit is fully refundable, meaning it would be paid out even if the filer owed no income tax. The so-called stimulus bill extended the program through the end of 2009, upped the maximum amount to $8,000 and eliminated the HERA repayment requirement as long as the purchaser retains the home for 36 months. Originally the credit would be repaid over a 15-year period after an initial two year waiting period.

The IG report comes amid widespread news reports of fraud, IRS investigations and the first indictment (in Jacksonville, Fla.) of a tax preparer fraudulently claiming credits totaling hundreds of thousands of dollars for his clients. One identity theft ring in Albuquerque, N.M., also scammed the system for hundreds of thousands of dollars.  The Wall Street Journal reports over 100,000 suspicious claims under investigation by the IRS.

“Every time Congress creates a new refundable credit — meaning that individuals can get a check from the government whether or not they have actual tax liability — the incentive for fraud is magnified, as we have seen for example with the high percentage of erroneous claims for the earned income tax credit, and with the recent videos showing ACORN officials advising people on how to fraudulently claim refundable child credits,” Rep. Charles Boustany (R-La.), the top Republican on the House Ways and Means Oversight subcommittee, told HUMAN EVENTS.

In the separate IG investigation, George told Fox News’ Neil Cavuto that hundreds of children, including a four year old child, thousands of illegal aliens and even current IRS employees improperly received the credit.

“We’ve uncovered that IRS employees themselves seem to be inappropriately claiming this,” George said.  “My auditors have uncovered instances of a minimum of 53 IRS employees who apparently illegally or inappropriately claimed credits for first time homebuyers.  Those cases have been referred to my office of investigations so they are active investigations.  In all honesty this was an interim report.  I expect that the number will be much larger than that number.”

“People under the age of 18, four year olds claiming this credit,” George added.  “Contract law generally prohibits someone under the age of 18 from engaging in that type of legal binding, yet we have many — we found at least 600 who benefitted from this.  Add to that, we have uncovered at least 3,000 non-U.S. citizens who have taken advantage of this credit where the legislation prohibits it.”

George said he made recommendations early on that abuses were taking place.  The IRS did not follow recommendations for procedures to address the ongoing fraudulent claims.

“The bottom line is the IRS did not follow recommendations that my office issued to them almost a year ago prior to the problem arising,” George said.  “We discovered many instances where people were seeking the credit and receiving it inappropriately.  We advised the IRS of mechanisms they could have employed to make sure that did not occur in the future.  Once again, the IRS didn’t follow our recommendation.”

In 2008, tens of thousands of e-filers claimed the credit for homes that had not yet been purchased, according to George’s hearing testimony:

The law requires that a home be purchased before the Credit may be claimed. However, we identified more than 19,300 electronically filed 2008 tax returns on which taxpayers claimed the First-Time Homebuyer Credit for a home which had not yet been purchased, but allegedly would be in the future. Had the IRS timely implemented our recommendations to both capture and use the purchase date from the Form 5405, these claims would not have been paid. The amount of the Credits inappropriately claimed via e-filing totaled more than $139 million. We have not yet determined the number of paper returns with similar claims.

With hundreds of millions of dollars being fraudulently bilked from the system, Congress is seeking to extend the program.  Again.  Unless renewed, the program is set to expire November 30.

The full IG report can be found online here.

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Connie Hair writes a weekly column for HUMAN EVENTS. She is a former speechwriter for Rep. Trent Franks (R-Ariz.).

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